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Back in May, AngloGold
Ashanti announced plans to sell its last remaining gold mine in
South Africa, the Mponeng mine southwest of Johannesburg. Despite extremely
rich 10 grams per tonne ore, “the challenges of making money at Mponeng are
immense,” stated a media report, referring to the depth (it’s the world’s
deepest mine) and high temperature working conditions. Whereas AngloGold
Ashanti made about a billion dollars profit from its South African mines in
2011, in 2018 gross profits from its operations there barely register on a
chart comparing its mines in other parts of Africa, the Americas or
Australia.

We also like gold because gold companies are finding less of it - this
adds to gold’s allure, and will eventually be factored into its
price. Not only is gold relatively rare compared to, say, iron or aluminum,
it is also facing dwindling global reserves.

One of the most well-respected CEOs in the industry, Mark Bristow, who
headed Randgold before it merged with Barrick, remarked on the
tight gold supply in a recent interview with The Northern Miner. Asked to
comment on how the gold industry could look in five to 10 years, Bristow had
this to say:

The industry is in decline. We’ve got ourselves into a really
tight spot because we haven’t invested in exploration and our future.

Now when you look at the average life of mine, it’s less than the time
it takes to discover and develop a world-class asset. The supply side of our
industry is very tight. The demand side … and I disagree with some of the
talk presenters here today, in that gold is an inelastic industry just like
everything else.

When we overdid the hedging and dumped twice as much gold into the
market that we were actually producing, the gold price went to US$255 an
ounce. We stopped doing it, and it started going up. The Chinese started
buying gold, and it went even further.

Then all we did is we took lower and lower grades and produced more
and more gold and we put a roof, a ceiling on the gold price and we’ve driven
it down since then to a point now where we are staring at tightening in the
market.

Bristow’s comments inevitably lead into a discussion over peak gold - the
point at which gold production reaches a top, then begins falling, never to
return to previous levels. Are we there yet, and if so, how long before we
run out? What would peak gold mean for the gold market?

The answer is critical. If supplies can’t keep up with demand the price
will only go higher. On the flip side, if there’s still plenty of gold to be
found, theoretically the market could face a glut, pushing prices down.

In June it was announced that South Africa - which led global gold
production for a century and has mined half of the world’s bullion - lost its
continental golden crown to Ghana. Lower-cost mines, friendlier mining
policies and more projects under development catapulted
the West African country to the top position, producing 4.8 million
ounces in 2018 to South Africa’s 4.2Moz.

Predictions are that gold mining in South Africa could be done by
2050.

As for new gold mines, the bear market of 2012-16 meant most large gold
companies slashed exploration budgets and juniors had an extremely tough time
raising cash, to conduct drill programs that identify the next
motherlode.

Yet the idea of peak gold has always been controversial and continues to
be. If the amount of reachable, and economic gold resources is finite,
presumably gold companies have a shelf life. It means gold mining is a sunset
industry that will only see so many more bright orange spheres slipping over
the horizon before the last ounce of gold is poured.

On the plus side, if gold is indeed becoming scarcer, prices have only one
way to go and that’s up, so long as demand for the precious metal
is constant, or growing.

As gold investors, we want to know the truth. In this article we are
asking: Has the industry hit peak gold?

For the answer we turn to hard evidence, such as reports by McKinsey & Company, the World Gold Council,
and S&P Global Intelligence. But first we need to know what happened
in the gold market over the past few years to get us to the point where we
even have to ask the question.

The making of peak gold

The burst of the dot-com bubble in the late 1990s ushered in the present
gold market which rode the tailwind of a decade-long commodities boom. The
mining supercycle started in 2001, when a one-ounce bar of gold
could be purchased for $255, and peaked in 2011, when the gold price hit an
all-time high of $1,907/oz.

As McKinsey’s chart below shows, gold’s dramatic rise has only been
equaled once in the last 50 years, during the global recession of the early
1980s.

During the commodities boom, a continuously rising gold price had gold
company CEOs uttering the mantra, productionat any
cost. Gold giants like Newmont, Barrick, Goldcorp and Newcrest
tried to out-mine each other with the annual ounce count being the main
driver of shareholder returns and CEO bonuses.

According to McKinsey’s research, between 2000 and 2012, annual capital
expenditures by gold mining companies increased 10-fold, with the aggregate
spend exceeding $125 billion. Two thirds of projects exceeded budgets by 60%,
and half experienced delays of one to three years.

As new mines started up and existing ones were outfitted with the latest
equipment, reserves started to thin out. At the time, it was thought the best
way to replace reserves, along with brownfield exploration (tapping existing
or historic mines), was through mergers and acquisitions (M&A); between
1998 and 2012, 42% of gold companies’ reserves growth came via M&A.

From 2000 to 2010, the industry saw over 1,000 acquisitions with a
combined value of $121 billion, versus just $27 billion from 1990 to
2000. It was an all out acquisition spree, growth at any cost,
growth just for growth sake. Quality of the acquisition sometimes seemed to
be of secondary importance.

The problem was all these acquisitions were done at the height of the gold
market when nobody, well almost nobody, thought the hype could end. Examples
included Goldcorp buying Canplats at a 41% premium to its share
price, and Newcrest offering Lihir Gold shareholders the same
percentage premium for an $8.5 billion acquisition. Their sins would soon
find them out.

By 2012 the gold party was over.

For gold companies, there needed to be a major shift in their thinking.
How could they remain profitable, having gorged themselves for 10 years on
acquisitions and capital expenditures, conducting their business like it was
a Roman orgy, but now working with a gold price that had almost been cut in
half? The answer was cost control.

From “production at all costs,” the new modus operandi was “aggressive
cost-cutting, by all means”. Between 2012 and 2017 all-in sustaining costs
(AISC) dropped by around 20%, through three main strategies, according to the
McKinsey report: driving down costs, freezing capital expenditures and
cutting debt.

A few notable facts regarding these three austerity measures:

Cost-cutting programs were aided by lower crude oil
prices (recall oil prices fell off a cliff in the fall of 2014) and
lower exchange rates. The currencies in several key mining countries all
depreciated against the US dollar between 2012 and 2017.

Since 2012, all but one of the largest 20 gold companies
has significantly reduced capex.

Exploration budgets were cut drastically. Between 2012
and 2016, exploration spending more than halved, from $20.5 billion in
2012 to $8.7 billion in 2016. This included both greenfield and
advanced-stage projects.

The industry went to great lengths to repair
over-leveraged balance sheets. Through a combination of asset
impairments, asset sales and closures, industry debt was reduced by over
$10 billion between 2013 and 2017.

With gold companies now leaner and meaner, and several having been
obliterated during the vicious gold bear market of 2012-16, there are less
firms to be acquired, and fewer ounces available for gold majors wanting to
replace and expand their reserves.

Unless gold companies discover new deposits and build or buy new mines,
they will eventually deplete themselves. As for getting more gold
through acquisitions, while there has been a recent stir of
gold M&A, consolidations have dropped considerably, to just $9
billion worth of deals in 2017, an 85% reduction from the gold M&A peak
in 2011.

The case for peak gold

A compelling argument for peak gold is the fact that, while gold
production has been increasing every year (except for 2016, noted above) -
it’s been growing in smaller and smaller amounts. That is, while gold output
in 2018 was higher than 2017, it was only 1% higher - 3,347 versus 3,318
tonnes, according to the World Gold Council. Gold production of 3,318t in
2017 was 1.3% more than 2016’s output of 3,274t. This phenomenon is shown
graphically below.

It's not surprising that gold companies are finding it tougher to add to
global reserves. The fact is, all of the easy, low-hanging fruit
has been picked. Even with a six-fold increase in exploration spending
between 2002 and 2012, there has been a significant dearth of new
discoveries.

According to McKinsey, in the 1970s, ‘80s and ‘90s, the gold industry
found at least one +50 Moz gold deposit and at least ten +30Moz
deposits. However, since 2000, no deposits of this size have been found, and
very few 15Moz deposits.

Any new deposits will cost much more to discover. This is because they are
in far-flung or dangerous locations, in orebodies that are technically very
challenging, such as deep underground veins or refractory ore, or so far off
the beaten path as to require the building of new infrastructure from
scratch, at great expense.

The costs of mining this gold may simply be too high.

A few examples from the McKinsey report confirm the trend of
diminished gold reserves:

At the Witwatersrand Basin in South Africa, the largest
gold field ever found, gold production has been cut 84%, from its
1,000-ton peak in the 1970s to just 157 tons in 2017.

Australia’s Super Pit and the Carlin Trend in Nevada are
both facing depleted reserves.

The reserves of the major gold companies have shrunk
26%, from 967 Moz to 713 Moz, while the average life of
mine is now 15 versus 19 years.

Gold discoveries peaked in 2006 and since then there has
been a decline in both the number of new discoveries and the amount of
contained gold. This is despite the industry exceeding $50 billion in
exploration expenditures, over the last 10 years, almost double the
total spend of the preceding two decades. (ie. spending more, finding
less)

Along with a lack of large discoveries, McKinsey & Co. offer three
more reasons for why the gold reserve situation has worsened so much:
funding for juniors has dried up, majors slashed exploration budgets and
focused on brownfield development, and high-grading deposits has accelerated
depletion.

It used to be that major gold companies had large exploration budgets with
which to conduct programs to replace and expand their metal reserves. After
the gold market crash in 2012, one of the first victims of austerity programs
were majors’ exploration budgets. As an industry, annual budgets went from
$10.5 billion in 2012 to just $3.2B in 2016. The following year saw a 20%
increased to $4 billion, but still more than half of 2012 levels.

“The effect of this reduced spend and limited scope meant that
mining companies were barely able to replace produced ounces while converting
nearby resources to reserves,” the report states.

Moreover, the majors shifted their attention to brownfield projects from
more risky green fields - leaving that to the gold juniors.

Discoveries < reserves depletion

The absence of major discoveries over the past several years, combined with
reserve depletion, has put the gold industry in a real pickle. In the 1970s,
every ounce of gold that got depleted was replaced by 2.6 ounces of new gold.
Today, for every ounce of reserve depletion, only half an ounce is
discovered.

Between 2013 and 2015, when gold was in a bear market, gold reserves fell
by 17% to 1.3 billion ounces and gold resources dropped 14% to 2.5 billion
ounces, according to a background report. Reserves in 2016 were 34% below
their 2011 level, having declined for five years straight.

At that rate of depletion, and without meaningful discoveries, reserves
and production will continue to drop. In fact, gold production is expected to
peak in 2019, followed by a steady decline. Peak gold this year? Why not.

The low rate of discovery along with drastically less capital to put
towards exploration, has left the industry with a weak pipeline of
development projects. Of these future mines, many are lower grade than
previous discoveries, in 2016 the average reserve grade for 266 producing
primary gold mines (ie. no co/ by-product metals) was 1.47 grams per tonne,
compared to 1.02 g/t for 310 undeveloped deposits.

Potentially less viable than high-grade operations, these future
lower-grade mines will contribute less to global gold production.

And there's another problem: It is taking longer, much longer, to
commission greenfield mines. While it used to take 12 years to bring a new
discovery to production a decade ago, today it will be 20 years. Some mines
in sensitive jurisdictions, like the US and Canada, requiring copious
environmental studies and special interest group sign-offs, could take
up to 30 years!

High-grading ----> reserve destruction

Another key point to realize about peak gold – and this is the
most important takeaway from this article - is the practice of high-grading. High-grading
is what often occurs when a gold-mining company's costs are higher than it
would like them to be, cutting into profitability and market capitalization.

It’s a little more complicated but keeping it simple – a typical mining
operation takes different grades of ore from different areas of the mine and
blends it. The idea is to provide a steady, grade-controlled ore feed to the
mill.

With high-grading, instead of mining a deposit as it should be,
economically, by extracting, blending both low-grade and high-grade ore at a
given strip ratio of waste rock to ore – the company “high-grades” the
orebody by taking only the best ore, leaving the rest in the ground.

The effect is to immediately boost the company's profits, since it is
spending less to move material than was planned for in technical
reports (PEA, prefeasibility study, feasibility study), and the higher-grade
ore fetches a higher price per tonne. A company employing this mining method
will fat margins.

The problem is that glossing over the lower-grade material effectively
removes it from the company's reserves, until the gold
price rises and it can be economically extracted again. There may
also be technical challenges in getting to that lower-grade ore, making it
too costly to extract even at a higher price.

The implication of high grading is a dramatic improvement in a company's
margins, but at a huge loss of ounces to its reserve base, as well as
lowering the deposit's average grade, since all the best material has been
removed.

The evidence of high grading, the smoking gun, is revealed in the changes
to gold reserve grades over the years. The chart below shows that for both
open pit and underground gold mines, and a combination of the two, reserve
grades over a 10-year period fell 35%.

Dundee Capital Markets

According to McKinsey, in 2016, about 60% of gold operations were mining
with mill grades above the mine’s reserve grade – in other words, they were
high grading. Large mines where this was occurring included Goldfields'
Granny Smith mine in Australia, Goldcorp's Cerro Negro, Argentina and
Barrick's Turquoise Ridge operation in Nevada.

Notice the blue circles that represent mill head grades at gold mines in
2016 that were higher than reserve grades. The black circles are mines where
mill head grades were less than the reserve grades. The head grade is the
average gold grade that will be fed into the mill. Two takeaways from the
graph – first, there were many more blue circles than black, showing more
mines high grading than not. Second, some mines were sending ore through the
mill at grades way richer than reserves – up to 20 grams per tonne higher.

There is no reason to think the practice of major gold mining companies
high grading their reserves has stopped. Gold mining is a low
margin business, in fact companies rarely make money at it. The one way to
ensure profitability by maximizing your returns and minimizing your costs of
production, is high grading.

We know from a combination of McKinsey's and Dundee Capital Markets' data,
that it's been going on since at least 2005.

But there's more to it than just a gold company fattening up its margins
and robbing Peter, representing the long-term life of mine, to pay Paul, the
next couple of business quarters. High grading provides the fuel for mergers
and acquisitions. The way it works is this: Major gold companies are running
out of ore, as they churn through reserves that were discovered 15 - 20 years
ago. It costs too much, takes too long, and is too risky exploring greenfield
projects, so they let juniors do that. They could expand their mines, or
explore in and around others they acquire, but that too requires heavy
expenditures.

Instead a gold major high graded its reserves, which boosts its earnings,
and fills its coffers in order to be able to afford an acquisition. If the
deal is approved, the company not only gets new reserves – solving the
problem of depletion – it also gains the opportunity to high grade the new reserves,
at the cost of many hundreds of thousands, or millions, of ounces, plus lower
grades.

Also, lumping the new reserves into their existing ones disguises the fact
they've been high grading, which wouldn't go over well with shareholders.

Gold miners use shareholder money to high-grade reserves to achieve
maximum revenues from gold sales. Costs remain low because much less
earth is moved to get the best ore. Its treasury bulked up by high
grading, the company is then in a position to buy a company and its
reserves, thereby replacing those lost to high grading. Rinse and repeat.

High grading in a falling gold-price environment has reportedly diminished
the lifespan of existing mines. According to Scotiabank, the average mine
life of the miners it covers has fallen from 19 years to 12 – the shortest in
30 years.

Finally, sourcing ounces through acquisitions (after high grading) is
neither sustainable nor cost-effective. Between 2006 and 2015, the average
cost of acquiring reserves was $241 per ounce – six times the cost of adding
reserves through exploration, states the background report.

High grading their reserves is terrible for the industry, because short
term profits are made while inflicting long-term pain, in that millions of
ounces are left unrecovered, and likely never will be, unless the gold price
rises enough for those lower-grade reserves to be economically mined.

In sum, the combination of high grading, which lowers both reserves and
grades, a drastic reduction in new discoveries due to a lack of exploration
spending, and decreased mine lives, means the industry will be extremely
challenged to maintain current production levels. According to the background
report, by 2020 global mine production is expected to drop 3% to 95 million
ounces and keep falling after that – in other words – peak gold. The report
estimates that by 2025 production will be one-third lower than 2020's output.

Junior pain

As mentioned, within the past several years, large gold companies have
shifted from greenfield (early stage) to brownfield (historic producer)
exploration. Whereas in the 1980s, junior gold companies discovered 10-30% of
new mines, after 2000 they have accounted for up to 75%, according to the
McKinsey report.

Passing on the responsibility for greenfield exploration to the juniors -
which in our universe of companies consists of firms under a $50 million
market cap - would have been fine if the money pipeline to these companies
kept flowing.

A junior resource company's place in the food chain is to acquire
projects, make discoveries and hopefully advance them to the point when a
larger mining company takes it over. Discoveries won’t be made if juniors
aren’t out in the bush looking at rocks.

A 2019 report by deal tracker Oreninc and the Prospectors &
Developers Association of Canada (PDAC) paints a glum picture of our junior
resource market, albeit with a few bright spots.

First of all, we note that the number of mining industry issuers has
dropped considerably over the past few years on the materials-centric Toronto
Stock Exchange (TSX) and its sister TSX Venture Exchange. Whereas in the
first half of 2012, there were 1,300 companies listed, by H2 2018 they had
dropped to 971 – a decrease of 329 juniors. As of June, there are 948 mining
issuers on the TSXV, out of a total 1,700 companies on the exchange – showing
a 79% concentration in mining.

Honing in on the report's figures for mining companies under $100
million market cap, Oreninc tells us that funding has declined 38%,
from $2.4 billion in 2017 to $1.5 billion in 2018. This compares to a 30%
drop for a much larger data set of juniors under a $1.5 billion market
capitalization, showing that smaller companies suffered most in 2018.

Companies with market caps from $0 to $25 million, and $25-50 million,
lost 40% and 60% of funding, respectively, compared to 2017.

However, Oreninc also notes that, between 2011 and 2018, nearly
half (47.9%) of all junior funds raised were by companies under $100 million
market cap, whereas companies above $500 million market value raised under
15% of the funds.

It was also noted that of the various commodity types, gold was by far the
leader, with 42% of funds raised in 2018, compared to 2.2% for silver and
7.9% for copper.

Getting loans from banks has also become more difficult, considering the
long lead time from discovery to production, and to cash flow. McKinsey notes
the largest funding packages have been offered to late-stage projects or
brownfield expansions.

1,000-tonne annual deficit

Returning to the question, ‘Have we hit peak gold?’ means checking on some
key statistics from the World Gold Council (WGC).

It's a tricky question though. Conventional wisdom holds that peak gold is
the point when the amount of gold supply hits a ceiling, then stops
increasing. By this definition, as shown by an earlier graph, gold has been
increasing, year by year, although by smaller and smaller amounts –
supporting the idea of the gold supply slowly building to a top.

But if we define peak gold as the point when mined supply no longer meets
gold demand, the gold market peaked a long time ago. Allow me to explain.

Last year (2018) gold demand reached 4,345.1 tonnes.

WGC reports that 2018 was a record year for mined gold production –
3,347t.

Gold jewelry recycling was 1,173t, bringing total gold supply last year to
4,520t.

If we stop there, we show a slight gold supply surplus of 175 tonnes. Peak
gold debunked!

This is significant, because it's saying even though major gold
miners are high grading their reserves, mining all the best gold and leaving
the rest, even hitting record gold production in 2018, they still didn't
manage to satisfy global demand for the precious metal, not even close. Only
by recycling 1,173 tonnes of gold jewelry could gold demand be satisfied.

Now the question becomes, how do we, or can we close that 1,000-tonne (for
round numbers) gap?

One way is to wait for a higher gold price, so that gold companies can go
in and mine all the lower grade gold that was left over from high grading.

How about new supply coming online? Well, we have a good idea of what that
looks like, thanks to a recent report from S&P Global Intelligence.
S&P is forecasting that over the next decade, major discoveries will
increase to about 363 million ounces. That’s 11,343 tons, or 1,134t per year
– enough to meet our 1,000-tonne deficit. But here's the kicker: According to
S&P, previous research found it took 20 years to advance a greenfield
gold project to production. Say the first 1,134 tons of gold, of S&P’s
projected 11,343t, is discovered this year. It will be 2039, at the earliest,
before any new gold is poured, which doesn't help with our current supply
deficit at all, does it?

We're also being rather optimistic that the entire 1,134 tonnes found in
2019, and every year for 10 years of S&P's 363 Moz of new gold,
is in the right ballpark.

Mine plans change, there may be strikes, or delays, plus the entire gold
reserves are never completely mined out. Remember average mine life has
dropped to about 12 years, so the operator has less time to mine and process
all the gold promised in technical reports like the PEA. Not only that, the
gulf between discovery and production has widened. It is estimated that, due
to so many hurdles, only one-third of a company's gold resources will ever
reach the mill! Recall also, that it now takes 20, and in the future,
possibly up to 30 years for a new mine to reach production. A lot can happen
in 20 to 30 years.

Growth in a time of reckoning

Ah, you say, what about gold that was discovered 15, 20 years ago that is
about to go into production this year, next year, and so on? S&P
Intelligence has an answer for that question, too. Spoiler alert: it
doesn't correct our deficit, either. The research firm predicts a 2.3 million
ounce (65-tonne) increase in 2019, with over half of that additional output
coming from recently commissioned mines. That's great, but it still doesn't
come anywhere close to meeting last year's gold mining deficit of 998t, without
having to recycle jewelry.

Rising demand

We're also not taking into account the fact that gold demand
might go up, and it probably will. That would mean having to find even more
gold per year, maybe it's more like 1,500 tonnes, or 2,000t, just to meet the
demand. You can see where we're going with this...

The World Gold Council's latest
report shows gold hitting a three-year high in the first half,
lifted by record central bank buying, as central bankers re-position their
holdings in reaction to a more dovish global monetary environment. They see
Treasury yields slumping and real yields low or negative, so they are backing
up the truck for gold.

The precious metal used mostly for jewelry and investment purposes has
booked impressive gains year to date.

We know that President Donald Trump wants a massively lower dollar and
will do anything to get it, including using the trade war with China as a
means of getting the Federal Reserve to cut interest rates. Read more
at Trump's
perfect gold storm

Trump thinks a low dollar is the way to bring jobs back to the US after so
many were exported abroad to take advantage of lower labor costs. He wants to
rebuild the US manufacturing sector, primarily through cheaper exports. He’s
particularly targeted China for competitively devaluing its currency to dump
cheap exports into the US, such as steel and aluminum. All Chinese imports
into the US are now subject to tariffs of between 10 and 25%.

Beyond the trade dispute, there are other reasons for owning gold that we
outlined in a previous article. They include safe-haven demand driven by such
dangerous conflicts as the war in Yemen, the frequent tensions between the US
and Chinese navies in the South China Sea, and the close call with Iran
recently over a drone strike.

On Monday the Trump administration froze all of Venezuela’s assets,
putting the South American failed state in the same company as Cuba, North
Korea, Syria and Iran. NBC News reports the ban blocks US companies and
individuals from doing business with the Maduro regime and its top
supporters.

There is also a brewing confrontation between South Korea and
Japan over a set of disputed islands in the Sea of Japan. The South
Korean Military wants to conduct defense drills at the Takeshima islands
which are claimed by Japan but controlled by South Korea. According to Japan
Times, the conflict is the latest in a series between the two former WWII
adversaries, that stem from court rulings last year ordering Japanese firms
to pay compensation to South Koreans, forced to work for them during the
war.

Finally, something we predicted several months ago looks more likely -
an arms buildup between the US and Russia. A
week ago Friday the US formally withdrew from the 1987
Intermediate Nuclear Forces Agreement (INF), which restricted missile
launches from the two Cold War enemies. Without a new agreement in place,
there is nothing stopping Russia from developing new missiles pointing at
Europe, and the US responding in kind, or vice versa.

Resource nationalism

Consider too that there will always be resource nationalism, no-go zones
where gold mining is either too dangerous for gold companies to paint a
target on their backs, or too risky to gamble shareholders' equity.

While resource nationalism is among the worst things a mining company can
encounter when investing in a foreign country (just ask Crystallex which
fought Venezuela for years over a 2008 decision to expropriate its
Las Cristinas gold project, finally winning
a $1 billion settlement), it can also have an impact on metals
fundamentals. If enough supply is taken out of the market due to
government-imposed restrictions, prices of those metals will rise.

Retirement tsunami

Finally, looming labor shortages threaten to derail the best-laid plans to
boost gold output, the next decade and beyond. A combination of mass
retirements and increasing natural resource demand from emerging economies
has created a crisis in the resource extraction sector.

The Mining Industry Human Resources Council (MIHRC) has said that about
40% of the resource extraction industry’s workforce is at least 50 years old
and one third of them are expected to retire by 2022.

The organization also forecasts that the Canadian mining industry will
face a shortage of 140,000 workers by 2021 – this number of workers being
needed just to maintain current levels of production.

The skills shortages are global, they are happening in South Africa,
Australia, Canada and South America. Costs are increasing, projects are being
deferred or even canceled due to the inability to staff operations - tighter
labor markets also provide unions with greater bargaining powers when dealing
with companies over wage settlements and other disputes.

This retirement
tsunami has taken a long time to build, but it won't be long before
it reaches landfall. Just when we need the mining industry most we are
starting to suffer a massive loss of accumulated wisdom, knowledge and field
experience. This means future mineral output will be constrained and that has
bullish implications for prices.

Conclusion

Peak gold is a divisive topic. Mining and exploration companies hate the
idea, since it implies a sunset industry. Investors love it, because it
indicates a long-term, bullish trend that would keep upward pressure on
prices, assuming demand is static or increases.

As for whether we have reached peak gold, the interesting number is the
record amount of gold mined in 2018 - 3,347 tonnes. Is this the most gold the
industry will ever produce? We’ll find out when the WGC’s 2019 full-year
report comes out. To avoid the peak gold cat-calls, production will have
to hit another record.

But here's the thing. You can't just look at the amount of
gold output one year versus the previous year, and if there's an increase,
conclude that peak gold is wrong. It's a valid argument to assert that gold
reached a peak when mined supply failed to keep up with demand; in 2018 the
industry mined a record amount of gold. Yet that record amount fell 1,000t
short of fulfilling new demand for gold. The gold mining industry for all the
reasons mentioned in this article, cannot now, and will not, in the future,
be able to meet ever increasing demand for gold.

The gold market currently relies on around 1,000 tonnes of
recycled jewelry to meet orders for gold.

What we have here is an unsustainable gold industry, driven by greed and
funded by shareholders who are unaware of what's going on behind the scenes.
As the industry continues to high grade and consolidate through M&A,
eventually there will be so few companies left to acquire, in order to keep
production and profits rolling in, that gold companies will finally have to
stand on their own. It's at that point that the real numbers will start to
show, that all they have left are their lower grade gold reserves, and not as
much as people think.

Sure, we can keep discovering and mining new gold fields, and we hope that
continues for a long time. But recognize that, like all other metals, gold
reserves and production estimates are always optimistic; they almost never
match the original figures.

Only a third of a mine's reserves make it to the mill and the average life
of mine (LOM) has dropped from 19 to 12 years. The rapidly depleting reserves
and grades, exacerbated by high grading, will accelerate a fall in gold
production - a change of direction from many years of annual increases –
perhaps as early as this year, certainly something that is going to happen
very near term.

Adding it all up points to a looming scarcity of gold, a trend that can
only be managed, not reversed. We're never going to meet today's 1,000-tonne
shortfall, never mind future increases in demand; peak gold is not a theory
it's a fact, and that can mean only one thing: higher prices.

But historically, and perhaps especially so today for all the reasons
listed above, the greatest leverage to rising precious metals prices has been
owning the shares of junior resource companies focused on acquiring,
discovering and developing precious metals deposits.

Importantly, juniors are a cost-effective answer to the problem of gold
reserves depletion. Because gold reserves are being used up faster than they
are being replenished, it behooves the industry to come up with a
strategy for reversing this trend – one that doesn't involve high-grading and
M&A. Rather than adding to the pot of global reserves, the latter “pours
reserves from one pot to another,” asserts Stephen Letwin, the President and
CEO of IAMGOLD Corp.

Letwin's excellent report 'Growth
in a Time of Reckoning' is required reading for anyone interested in
peak gold and how to replace gold sustainably – something we are not
currently doing and desperately need to change.

In his report, Letwin states that while there are multiple ways the
industry can boost its reserves, exploration is the only way to create
long-term value for the industry. The cost of the status quo is to rapidly
deplete global gold reserves, leaving millions of tonnes of low-grade ore
that cannot be mined until much higher prices. Here's Letwin:

The industry is ready to resume growth, but let’s do it the right way.
Strategies that continue to see global reserve increases replacing only half
of production will not create long-term value for the gold industry. Growth
strategies in the industry should be those that expand resources at existing
mines, identify near mine deposits that can leverage existing infrastructures
and lead to new greenfield discoveries. Only through strategies that increase
the global pot of mineable reserves can we reverse the trend in reserve
replacement. Acquisitions play a role, but unless for the purpose of
developing an asset that otherwise might not happen, they accomplish little
but a change in ownership. Some believe the trend can’t be reversed; let’s
prove them wrong.

Do you want to own the cheapest gold and silver you can find to reap the
maximum coming rewards? If you do, buy it while it’s still in the ground.

The fact is junior resource companies – the owners of the world's future
precious metal mines - are on sale. If you like their management team, their
projects and their plans for 2019, perhaps now is the time to be acquiring a
position.

Why? Well besides the fact that I believe that precious-metals-focused
junior resource companies offer the greatest leverage to increased demand and
rising prices for precious metals, there’s obviously going to be a very real
and increasing trend for Mergers and Acquisitions (M&A). Juniors, not
majors, own the world's future mines and juniors are the ones most adept at
finding these mines. They already own, and endeavor to find more of, what the
world’s larger mining companies need, to replace reserves and grow their
asset bases.

Precious metals-focused junior companies are again going to have their
turn under the investment spotlight and should be on every investor's radar
screen.

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